Big Lenders Want Sloppy Accounting For Their Sloppy Mortgages

January 2008

Library Sections:

Seldom a day goes by that we do not hear pleas from the borrowers who took high risk, no verification loans (aka liar loans), or their lenders who were willing to make these bets. Both the borrowers and their lenders expected to make money from an ever-rising real estate market.

Now that things have changed, the banks that got themselves into trouble are asking that the accounting rules be changed. Not shockingly, the proposed change allows the banks to record smaller losses.

The desired change is to a rule that has been around for 15 years; namely SFAS 141. SFAS 141 was formulated in response to requests by lending regulators after the savings & loan debacle. The calculations are not difficult and can be easily performed with a hand calculator, or in larger volumes with a Microsoft Excel worksheet. Nevertheless, in a recent letter to the Financial Accounting Standards Board (FASB), the Mortgage Banker’s Association (MBA) claims their members need help because:

”MBA members report that they do not have the systems capability, and are unlikely to be able to obtain the capability, to evaluate huge volumes of modified loans under FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan. MBA is greatly concerned that without some relief in the form of additional guidance from the FASB, mortgage lenders would be in the untenable position of having to modify loans that they could not account for in conformance with generally accepted accounting principles (GAAP). … Given the pressures being brought to bear on lenders to undertake mass modifications, MBA believes they should be permitted to continue to apply the guidance in FAS 5…”

Under SFAS 5, banks avoid recording a loss so long as they expect to eventually get their principle (but not interest) back. This is true regardless of the length of time required to get the principle back, even if not a cent of interest is ever paid. Of course, anyone actually modifying loan terms would perform a calculation not dissimilar to what SFAS 114 requires.

The MBA declined to provide the name of a single member unable to apply accounting literature that is 15 years old and could be performed with something as basic as an Excel worksheet. Not surprisingly, no individual public company would want to make such an admission.

The simple fact is that these large lending and Wall Street firms are highly sophisticated. No one worthy of collecting a small portion of the paychecks being received by the financial management of these firms would have any real challenge making the required calculations. If the required calculations showed smaller losses (instead of the other way around), this request would never have been made.

This request raises issues of credibility and integrity that are hard to ignore. Shame on the Wall Street firms and mortgage lenders behind this. The MBA proposal should be summarily dismissed.

Fulcrum Inquiry is a licensed CPA firm that performs forensic accounting, financial investigations, and operates SOX-compliant whistleblower complaint systems.